Posted by: Josh Lehner | January 14, 2021

Rising Housing Wealth

Economists are increasing optimistic on the outlook in large part because household incomes are up, and consumer spending has largely followed. But it’s not just current income, we know asset markets are strong as well. Wealth is increasing, which supports additional consumer spending should households want or need it. While stock market wealth is very concentrated among high-income households, real estate wealth is a bit more broadly distributed, and is the key source of wealth for households in the middle and bottom parts of the distribution.

Given home price appreciation and a rising homeownership rate in recent years, the total value of owner-occupied housing is increasing faster than the overall economy as seen in the chart below. For now this excludes rental properties as some of those equity gains go to owners outside of the region, and the rental income from those properties shows up in the current income data.

But looking at the total value of housing overstates the real situation because it does not account for mortgage debt. The next chart tries to adjust for that. These estimates are built off of median mortgage debt and home equity lines of credit information, coupled with median home values. Then adjust those for the share of households who own their home free and clear and the like. While it’s a decent, rough estimate of owner-occupied equity in Oregon, it is also an underestimate of the true number because it is but off medians and not averages (average debt data is not readily available).

Even so, the patterns are very clear. Home equity is much larger today, relative to the size of the economy, then back during the housing bubble. There is a considerable amount of housing wealth that remains largely untapped today. And of course the Bend MSA really stands out on this chart. I was honestly surprised at the sheer size of home equity when I first put this together. I’ll come back to this in the near future, but the relative size of housing wealth in Bend puts it pretty rarefied air when looking across the nearly 400 metro areas around the country.

While the rise in home equity is clearly relevant from a personal finance perspective, what does it mean for the economy more broadly? That’s a little bit harder to say. I’ve spent some time lately re-reading a few research papers. As expected, the main conduit for broader economic implications is through consumer spending.

One of the landmark academic papers from Mian, Rao, and Sufi (2013) finds that the marginal propensity to consume out of housing wealth is 5-7%. That means if your home equity increases $10,000, then you will spend an additional $500-700. More recent research from Moody’s Analytics (no link) estimates that figure is closer to 4% in the years since the housing bubble burst. Even so, with home equity rising by tens of billions of dollars in Oregon last year, that would support additional consumers spending by hundreds of millions, if not a full billion of dollars.

Of course home equity isn’t liquid. One has to do a cash-out refinance, or take out a home equity line of credit or the like to access the wealth and spend it. As Calculated Risk has been tracking over the years, mortgage equity withdrawal has been really tame since the bubble, although it has picked up this year for the first time in a decade. Given the strong home equity position, and record low interest rates, it is possible that we will see more mortgage equity withdrawal moving forward as well, if it is needed.

So what do people do when they withdrawal equity? Recent research out of the Federal Reserve shows that many households spend it on home improvements, furnishings and the like. In other words the most common thing is taking out equity to improve or update the house itself. Other things households do is save a lot of it initially, likely to spend or invest it in the years ahead, or consolidate other forms of debt, with only relatively small amounts spent on other types of things like autos. Generally speaking households don’t treat home equity as an ATM. They seem to generally have a plan, which is great!

Given households incomes are up and the economy is not fully open, what else could households be spending their equity on in the last year? One thing to keep in mind is that we know personal savings and home equity are the major source of funding for small businesses. See the Federal Reserve’s Small Business Credit Survey for more. Even as the economy is doing much better than feared, businesses have struggled. Given the timing here, I think it makes a lot of theoretical sense that some of the recent equity withdrawals are being used to support businesses. Time will tell to what extent that is actually the case.

Finally, another option could be retirees maintaining their general spending or paying for long-term care which can amount to tens of thousands of dollars a year. This was a possibility brought up on Twitter by former Oregon Representative Julie Parrish, with a few others chiming in saying it’s a big, and growing need as the population ages. As our office has discussed before, many retirement-aged households do not have adequate private savings and social security accounts for the bulk of their income. So using home equity as a source of income would make sense when it is needed.

To this point, we know there is a growing number of homeowners who own their homes free and clear. They have lived in them a long time and have paid off the mortgage. This is expected to continue to increase in the years ahead, due to the Baby Boomers retiring. Now, a couple complicating factors here is that the Fed research noted above shows that mortgage equity withdrawal is something that 40-somethings do the most, and 60- and 70-somethings do the least. Additionally, we know downsizing also isn’t really a thing. As such, it is probably reasonable to expect long-time homeowners to largely sit on their equity until the day comes when they either have to move into some sort of assisted living, or their finances dictate a need.

All told, home equity has been increasing considerably in the past decade. Current homeowners are in much better financial positions than they were a decade or two ago. Just how much this equity will support consumer spending and future economic growth is still to be determined. Even without a big increase in mortgage equity withdrawal, it could add a couple tenths of a percent to annual GDP growth. Of course not all of this is good news. The system we have in place where homeownership is the best (only?) path to wealth building for most households isn’t great. Housing cannot be both affordable and a good investment, outside of the forced savings part and paying down debt. One reason equity has risen is due to the undersupply or relative lack of new construction driving prices higher.

Stay tuned, I have a lot more along these lines coming in the near future including an update on construction relative to population growth, comparing housing wealth across metro areas, and digging further into the latest Survey of Consumer Finance to look at the stock of unrealized capital gains.

Posted by: Josh Lehner | January 8, 2021

Fun Friday: What on Earth is Information?

Quick update. This morning we got the U.S. employment report for December. The headline numbers are bad. We lost 140,000 jobs and the unemployment rate held steady. For an expansion these are horrible figures. But from a macro perspective, it’s important to see through this temporary COVID-related weakness. The losses were concentrated in Leisure and Hospitality and Education. There remained underlying job growth in things like construction and manufacturing. Our office was been talking about the dark winter ahead and how the economy would weaken due to the virus, and being forced indoors more due to the weather. Well, we’re in that now. The good news is the vaccines continue to be rolled out, and another round of federal aid has been passed which includes expanded unemployment insurance benefits for those laid off. The overall recovery remains intact. Even if you know a rough patch is ahead, it always feels worse when you’re actually in it.

With that said, on to Fun Friday. I want to highlight an industry that is rarely talked about. Or, as we will see, we tend to talk about bits and pieces of this sector because it’s a bit of a hodgepodge at the topline. That sector is Information. Here is how it is briefly defined.

The Information sector comprises establishments engaged in the following processes: (a) producing and distributing information and cultural products, (b) providing the means to transmit or distribute these products as well as data or communications, and (c) processing data.

To be honest, I’ve been waiting years to talk about the Information sector. The first draft of this post was from 2015. The sector did come up in our latest forecast release and given the disparate impacts of COVID, now is a good time to actually talk about it and the outlook. But one of the main reasons we don’t tend to talk about it too much is it is relatively small. Pre-COVID, the sector accounted for under 2 percent of statewide jobs. Plus in the big picture, employment is basically flat, albeit with some business cycle fluctuations.

But what makes Information interesting is that this topline masks considerable changes beneath the surface. I tend to think of Information in terms of 3 fairly equally sized subsectors, each with their own trajectory.

First there are the tech-related jobs in (prepackaged) software, and data centers. These jobs are growing, and outpacing the overall economy. Second there are the jobs in broadcasting, and motion picture — both in production, and movie theaters. Pre-COVID employment trends here were pretty stable, albeit with some growth. Third there are the jobs in media, publishing, and telecommunications that have been declining noticeably over time. However when you add up all of these different trends, you do get a fairly flat topline picture. It’s a Simpson’s paradox situation, if you will.

Now, COVID has changed this picture and altered the trajectories a bit. First, we have seen a little bit of tech-related weakness but our office expects that to reverse and job growth to remain strong in the years ahead.

That said, by far the biggest changes are seen in Motion Pictures. Actual production of shows and movies was shut down, and of course movie theaters are largely closed as well. There has been some growth in recent months but not much. Our office does expect these jobs to return when it is safe to do so in the months ahead, especially on the production side. However risks to the outlook for movie theaters is real. It’s not a big employment sector — around 2,000 pre-COVID in the state — but one where there may be long-run structural changes. Given some major studios have announced plans to release movies directly to streaming services (exclusively or simultaneously with theaters) even after the pandemic wanes, it does call into question the outlook. Some prognosticators are expecting movie theaters to move away from megaplexes and into more of a boutique business model as a result. Time will tell exactly how it plays out, but it remains something our office is monitoring. Enjoy your weekend!

Posted by: Josh Lehner | January 6, 2021

Oregon Population Growth in 2020

Solid data on pandemic migration and working from home has always been years away. Plus we normally see migration slow down during recessions. People tend to follow the jobs, and with fewer job opportunities in a recession, fewer people usually move. Our office has repeatedly tried to highlight these facts and patterns. We have also tried to flag that anything saying otherwise is based on limited, or anecdotal information and usually combined with speculation. It doesn’t mean it is wrong, just that our traditional measures of population growth take time. As such, today I wanted to highlight what we know, and when we will know it. As such, you’re likely going to be disappointed in the content of this post.

Let’s start first with the latest population estimates from our friends at Portland State’s Population Research Center. In 2020, Oregon’s population was 4,268,055 which is an increase of nearly 32,000 compared to 2019. This is the smallest annual increase since 2012 and continues the slowdown seen in recent years. That said, our office’s post-COVID forecast was for an increase of around 29,000, which called for a little bit sharper slowdown due to the pandemic and recession. Keep in mind this is total population growth so while net migration is the vast majority of growth, it does include births and deaths as well.

Now what you need to know here is that Portland State does a mid-year, July 1st estimate. So that means the numbers incorporate everything that happened in the second half of 2019 up through the pandemic and early summer. We know people didn’t move much during the shelter in place phase of the cycle. Furthermore, to the extent the recent boom in home sales represents a pick up in migration, that won’t be reflected until the 2021 estimates are available around next Thanksgiving. It’ll be awhile.

Another complicating factor here is the 2020 Census. That data has been delayed and as far as I can tell Census is saying the numbers will be released as close to Dec 31st, 2020 as possible. That likely means any day or week now. Why this matters is that the decennial census always acts as a demographic anchoring point. Once it is known, demographers will go back and revise the 2011-2019 data — what are called intercensal years — to make sure it all lines up and fits nicely between the 2010 and 2020 Census figures. Additionally Census does April 1st estimates so the number also won’t include any post-shelter in place migration trends.

Now, we will get the 2020 American Community Survey data in September 2021. That’s a continuous survey so will include responses from before, during, and after the shelter in place phase of the cycle. The ACS is the best place to get the characteristics of migrants (age, income, educational attainment, etc). But, again, it’ll be awhile.

With that said, let’s take a closer look at the 2020 estimates from Portland State. Overall, all regions of the state continued to see population growth, lead by the East Cascades and Portland metro regions. Specifically, 31 out of our 36 counties saw increases. This is a pick up from the 27 gaining population a couple of years ago. The population gains in the past decade, while uneven in the sense urban areas are growing faster, have been more broad-based across counties than in recent cycles.

Because we’re all interested in our own areas, here is an update of county level population growth since 2005. The light blue line is the statewide figures while the dark blue line is each individual county. (Central Oregon is a separate set of charts after this big one.)

Central Oregon usually grows significantly faster and is put on a separate chart to better allow for the changes in the y axis. In 2020 the general statewide trends are seen in the Jefferson estimates, while Deschutes growth holds steady and does not decelerate. One of the largest changes in growth from 2019 to 2020 is the sharp slowdown in Crook, going from around 3% in recent years to 0% in 2020. Given the strong home sales numbers, and historical patterns, I would expect Crook population growth to pick back up in the 2021 and onward data.

All told, population growth slowed through mid-2020. This was expected due to the pandemic and ensuring recession. The latest population estimates indicate this slowdown was note quite as sharp as our office forecasted. To the extent migration has picked back up in recent months it will show up in the 2021 population estimates which will be released late this year. Our office has started developing our next forecast, due out in late February.

Posted by: Josh Lehner | December 30, 2020

Oregon and the Cycle (Graphs of the Year)

What a year it’s been. The good news is that we started the year with the strongest economy we had seen in decades, and we’re ending the year with hope as the vaccines are being delivered. Everything else? Well, I’ve never had less fun.

Typically Oregon’s economy is more volatile due to our larger goods producing industries, and migration flows. Both of those are key strengths for Oregon and both are pro-cyclical. That means they grow faster in expansions but fall or slow further in recessions. However the 2020 cycle is a bit different. To date, Oregon has fared economically nearly the same as the nation. We’ve lost a few more jobs but our unemployment rate is a tad lower and our wages have rebounded a bit stronger. This is not the pattern seen in most recessions in the recent decades. That’s why I’m choosing these as the economic graphs of the year.

It’s important to point out that both of those main factors impacting Oregon’s volatility are currently rearing their heads. Our local manufacturing jobs losses are noticeably larger than U.S. losses, likely due to firm-specific or regional supply chain issues rather than the overall business cycle itself. And population growth slowed noticeably through the middle of the year, based on the latest population estimates. (We will come back to both of these discussions in the new year.)

So if our two factors are in play, why aren’t we experiencing a significantly worse recession than the typical state? It could be the nature of the cycle, where the tip of the spear is the in-person consumer services like leisure and hospitality. Those sectors in Oregon are of average size. Additionally this is a global pandemic. Everywhere is being hit at the same time, so there isn’t a lot of variation on the start of the cycle. Similarly the federal policy response has been pretty evenly distributed across the country in terms of recovery rebates, PPP and the like. The expanded UI has a bit more variation based on local job losses. Even so, it is much more likely that local and regional economic variation will show up on the expansion side as we get further away from the synchronicity of the pandemic.

On a related point, much of the OR-US employment gap* today (first chart) is in sectors most impacted by public health restrictions. Oregon has not fully reopened the economy, while some states put in few official restrictions in place. These differences in in-person services, including education, account for around 60 percent of the OR-US gap. On the other hand, the manufacturing gap accounts for around 30 percent of the total. Minor differences in all the other different sectors make up the rest.

Finally, all of this data is preliminary. Take it with a grain of salt. It will be revised in the months and years ahead. But for now this is overall encouraging in the sense that Oregon is not starting from the bottom of the pack like we normally do coming out of a recession. The question is whether we will see the same boost we normally do as the expansion accelerates in a few months. Our office expects this to be the case.

Cheers to 2021 being much better than 2020!

* On a technical note, Oregon does a preliminary benchmark of the employment data every quarter, while the U.S. only does it once a year. What the latest Oregon revisions showed was a slower bounce back in May and June than the initial estimates indicated. That’s when the OR-US gap opens up, and has held steady since. It is possible that future U.S. revisions will be of a similar nature and close some, or all of the OR-US gap. We shall see.

Posted by: Josh Lehner | December 18, 2020

State Revenues in Comparison

Today the New York Times is out with a good article on state tax collections. To those of you following along with our office, there is no real news here. State tax revenues are doing much better than feared at the beginning of the pandemic because the economy is doing much better. This is in large part due to federal aid to households and businesses, the nature of the cycle impacted low-wage workers the most, and asset markets rebounding to all-time highs. Our office and our counterparts across the country have been revising up our forecasts as a result in recent months. Do read the whole piece for more information and interesting anecdotes from other states.

I want to touch on three things.

First, and most importantly is discussing the chart included in the NYT article. As far as Oregon goes it is technically correct. Total General Fund revenues in Oregon from March through October of this year are down 17% compared to year-ago figures. However, these raw collections do not adjust for our unique kicker law. Oregon has paid out the largest dollar sized kicker on record this year. And while the money is returned to taxpayers this year, it was collected over the course of the 2017-19 biennium, so it’s not really a “loss” of revenue so much as a timing shift. Of course it is a “loss” in the sense that the state does not get to keep the revenue, but it is fundamentally different than saying actual tax collections are down.

Once you do adjust for the kicker, and some rough accounting of how much of that was paid out in February, you find that Oregon General Fund tax collections are flat over the year. I get somewhere in the +/-1% range depending upon those kicker assumptions. That vaults Oregon in the chart from the bottom to above the median state. Using my fingers and the magic of a smartphone, it looks something like this.

Second, this only looks at General Fund revenues with are around a quarter of the state budget. Other Funds (gas taxes, hunting licenses, etc) are also impacted but not shown here. More importantly, this does not include Oregon’s new Corporate Activity Tax (CAT). That is boosting actual state tax collections on a year-over-year basis because it is new. Last year Oregon collected $0 in CAT revenues. That said, our office has revised down the forecast for CAT revenues due to the recession and other technical issues. As such, even though CAT is boosting dollars in the door, that boost is smaller than expected at the time the budget was drafted a year and a half ago.

Third and finally, in terms of the state budget outlook, the fact that revenues have not plunged as they typically do in recession is great news. That said our office’s forecast for the upcoming 2021-23 biennium currently shows modest growth, which is likely to be slower than the increase in the cost of services and rise in demand for needs-based programs. As such, elected officials and policymakers still face tough choices as they draft the upcoming budget, but thankfully not as tough as expected earlier this year.

Posted by: Josh Lehner | December 17, 2020

Update on Oregon Personal Income in 2020

This morning the Bureau of Economic Analysis released state income data for 2020q3. Income data is available monthly at the national level, but only quarterly at the state level, and annually at the county level. Now that we have a few quarters, we can begin to better analyze how incomes and the different sources of income are doing so far in the pandemic. What follows are a few high level charts looking at incomes in Oregon today compared with past recessions.

Like we have talked about using U.S. data, this cycle is different. Personal incomes have risen so far in 2020 despite the pandemic and recession. This increase has meant consumer spending has held up, leading to more economic activity and tax revenue than first feared at the start of the cycle.

Of course we know the increase in incomes is due to federal aid, namely the CARES Act which included one-time recovery rebates and expanded unemployment insurance benefits to households, and PPP loans/grants to business owners which does show up here in the form of proprietors’ income. It is challenging to remove the PPP impact in the state data since it shows up as proprietors’ and not federal assistance. That said, removing the direct public aid to households is straightforward. The next chart compares underlying economic-related incomes across recent recessions. Today we know income fell nearly as much as it did during the Great Recession but has bounced back quickly as the economy reopened.

The last chart focuses strictly on wages. This shows the same general pattern of a severe recession followed by a strong bounce back. In the third quarter, Oregon jobs were down around 9% but wages only 1%. This speaks directly to the nature of the cycle and how low-wage service sector workers have been the most impacted. High-wage workers have fared relatively well. And those who have kept their job this year continue to see wage gains in line with recent years. This rebound in wages is certainly seen in the state withholding data as well, although that includes bonuses, options, retirement disbursements, and the like.

Note: I’m sure you’ve noticed in the charts how 1990 is different as well. At that time, Oregon suffered a mild recession and experienced strong in-migration, keep the overall economy in better shape that during nearly any other business cycle in history.

All told, this cycle is different. The federal aid earlier this year boosted incomes and kept households afloat. Much of this increase in income has been saved at the aggregate level. As households spend more on going out to eat, on vacations, and returning to pre-COVID activities, this savings will propel stronger growth next year. Although, as we discussed yesterday, we know lower-income households have drawn down this savings since the summer when the federal aid lapsed, and is likely the main reason on-time rent payments have fallen in November and December.

Posted by: Josh Lehner | December 16, 2020

Struggling Oregon Renters

This post was updated January 8, 2021 to include the latest data on rent payments, which do show improvements from mid-December.

Yesterday I was on OPB’s Think Out Loud. Among other things we discussed how many households are doing decent to well this year, even as our lower-income neighbors are struggling with dim job prospects until the pandemic is over. I made a statement along the lines that due to the federal CARES Act lower-income households have largely done OK through Halloween but have seen things deteriorate since. I wanted to expand on that for a moment.

First, due to the one-time recovery rebates and expanded unemployment insurance benefits, incomes rose noticeably during the early stages of the pandemic. Households across the income distribution saved much of those gains. However lower- and moderate-income households have begun drawing down that savings in the past couple of months. Recent research from JP Morgan Chase finds that this draw down in percentage terms is largest for the bottom quartile of families. At the end of October, those in the lowest income quartile still had median checking account balances about $200 higher than last year, but that increase had been shrinking since earlier in the summer. Their analysis stops at the end of October.

Since then, available data on rent payments shows some deterioration. Nationally, the NMHC rent tracker fell slightly in November but on-time payments in in early December declined noticeably from year-ago figures. Some of these may be made up with late payments throughout the month, but that is not yet known. (UPDATE 1/8/21: Much of the early December weakness was made up.) Overall this pattern can be seen locally based on the Census Bureau’s Household Pulse Survey. A rising share of Oregon renters are reporting being behind on rent in recent weeks, after holding steady from mid-May through mid-November.

The latest survey data also shows that Oregon renters are becoming more worried about their ability to pay next month’s rent and the possibility of eviction. Now, the share of renters reporting they are very likely to be evicted in the next two months, or have no confidence in their ability to pay next month’s rent remain largely within the range of previous surveys. The rise in recent weeks are more among those worried about such possibilities.

All told the various data points paint a consistent story of lower-income households beginning to fall behind in the past month or two. The federal CARES Act boosted incomes and savings through the summer. Effectively this cushion lasted into November, but given the rise in delinquent rent payments so far in December, it appears to be largely gone today. The outlook for such households remains weak until the pandemic is over. Only then will job opportunities return.

The best news is that after months of inaction and stalemate, the federal government appears on the verge of passing another relief bill. Reports indicate it will include both another round of recovery rebates and expanded unemployment insurance, albeit at reduced levels compared to the CARES Act. Should such a bill pass, it will go a long way to improving the finances of low-income households for the next couple of months. At that time the pandemic will have hopefully waned and the recovery will be in full swing. (Update: Congress did pass the package. The majority of the recovery rebates are already in Americans’ bank accounts today, and the expanded UI will last for a few months.)

Finally, I would note that from a big picture perspective, the distinction between micro and macro trends is important. It can be true that both overall household finances remain in good shape, setting the stage for strong growth near year, and our lower-income neighbors and friends need additional assistance to avoid falling further behind given their immediate job prospects are meager at best.

Posted by: Josh Lehner | December 11, 2020

Oregon Construction Outlook, Dec 2020

Typically, construction is a more volatile sector than the overall economy. It falls further in recessions, but bounces back stronger in expansion. New residential construction historically has been a great leading indicator with it’s declines starting ahead of full-blown recessions, and rebounding earlier as well. Commercial construction on the other hand tends to lag the cycle as the newly empty storefronts, warehouses, and office space from businesses closing in the recession need to fill back up in expansion before the cost of new construction pencils out and banks are willing to lend to these projects. Same goes for lodging which lags the overall cycle even more.

This cycle is different, however. Strong residential demand is keeping the overall construction industry afloat and in much better shape than in past cycles. This demand is due to higher-income households being less affected by the recession and trying to take advantage of record low interest rates. When combined with the strong, underlying demographics of Millennials aging into their 30s and 40s, the housing market is hot. This demand translates into increased economic activity and rising employment in construction, logging and wood products manufacturing, but also in related industries like finance, insurance, and real estate.

Statewide, all of the residential strength is in single family this year, which is largely where ownership demand shows up. New multifamily projects have cooled, although a pipeline of future projects remains.

Of course statewide trends mask some important patterns. The strength in single family activity is largely in the state’s secondary metro areas with Bend and Eugene seeing strong gains year-over-year, Medford and Salem being slightly positive year-over-year, and Albany with declines. Given we experienced a recession this year, this level of activity is very encouraging. The Portland suburbs are seeing somewhat less new single family activity, mostly driven by a drop in Washington County (I assume due to South Hillsboro getting built out but I am not entirely sure there). Even so, the drop off in single family in the Portland suburbs is not large, and still stronger than a couple years ago. Furthermore strength over in Clark County (not shown here) offsets about half of the suburban drop on this side of the river.

In terms of multifamily activity this year, the biggest change is a big drop in Multnomah which can account for nearly half of all statewide multifamily activity during a year. So a change there really impacts statewide figures. On the other hand, multifamily activity in the suburbs and across the secondary metros continues to pick up. Large increase in multifamily are seen in Clackamas, Deschutes, and Lane with smaller increases in Linn and Marion. There are noticeable drops in Jackson, Yamhill, and across the river in Clark.

Overall the construction outlook is solid, albeit mixed. Housing and related sectors are not expected to linger in recessionary limbo. The forecast calls for economic activity to remain at relatively high levels. Even so, expectations are for minimal growth over the next couple of years. This is a clear departure from past cycles where housing starts plunged and then rebounded. Homeownership demand should remain strong but the rest of the construction sector is likely to face weakening demand.

This is particularly true for commercial real estate, which remains a key risk to the medium-term outlook. The combination of business closures, less foot traffic, and demand for office space points toward less new construction activity in the years ahead. Leasing demand for retail, office, and leisure and hospitality will need to rebound considerably for vacancy rates to decline and rents increase enough to justify the cost of new construction.

The chart below looks at inflation-adjusted construction spending in Oregon, to try and get a better measure of the volume of activity and not just prices (revenue). Our office does not do an Oregon nonresidential forecast as we lack good, timely data on starts and spending. The available information we have from Census comes with a lag. However I am using national forecasts as a guide and how they may translate into local activity, hence the projection label.

In terms of the overall construction outlook, the strength in residential demand is expected to largely offset the weakness in nonresidential activity. In the chart above, it shows a 23% drop in nonresidential this year and next. This is large but not as big as the 45-50% drops in each of the past two cycles. Given so much of current nonresidential activity is based on backlog and not brand new projects, slowdowns in the planning of new projects today affect activity over the next few years. The key here remains how many vacancies arise and what the absorption rate looks like as the expansion gets underway.

In terms of public works, the outlook seems to have balanced risks. On the one hand public revenues are doing better than first feared, so money could be available for such projects. On the other hand, hard budget choices will need to be made and policymakers may choose to spending money in other areas of need more than on large construction projects. We shall see.

Lastly, note that we will come back to housing demand and population growth soon. Portland State is about to finalize their 2020 population estimates.

Posted by: Josh Lehner | December 9, 2020

The Urban-Rural Divide has Shrunk in 2020

Strong economies work wonders but they do not cure all ills. Disparities and inequities lessen during good economic times, but tend to widen during recessions. Our office is particularly focused on three main economic disparities: income, geographic, and racial and ethnic. So far, we know that due to the nature of the recession, income inequality is widening today. However, based on limited real-time information in Oregon, it does not appear that geographic or racial disparities are widening, or at least not yet.

In fact, preliminary employment estimates* indicate that the urban-rural divide has actually shrunk so far in 2020. Now it’s shrunk for bad reasons — urban areas have lost proportionately more jobs — and not for good reasons — rural areas growing faster over an entire expansion — but even so, it’s important to note the gap is not widening. So far this cycle rural Oregon is doing somewhat better than urban Oregon. This marks a departure from past business cycles.

Just for a quick comparison, here are the previous 4 recessions in Oregon. Rural areas have tended to lag in recovery compared to the state’s urban economies. Now, rural Oregon is growing overall in recent decades — not something much of rural America can say outside of the oil patch — but the growth is slower. The 2001 dotcom bust is an exception. At that time, the Portland region, with its major cluster of high-tech manufacturing, experienced the deepest downturn and prolonged recovery, whereas other urban parts of the state, namely Bend, Medford, and Salem escaped relatively unscathed at the time.

Back to 2020. The severity of the initial recession varied at the local level mostly due to the industrial structure. Places like the North Coast, Columbia Gorge, and Central Oregon all experienced large declines in part due to their outsized travel and tourism sectors. As the economy reopened and people began to venture out, growth has been strongest among these same places. What’s interesting to see is not that the rebound has been strongest here — that was to be expected. Rather what is interesting is that this rebound in growth has been strong enough to propel these regional economies past those in Portland and throughout the Willamette Valley. These hard-hit economies are now doing somewhat better over the entire cycle to date than the large urban centers in the valley.

In fact, so far in recovery, the Portland region has seen the slowest growth. This may be due to the lack of rebound so far in high paying industries which tend to be located predominantly in urban areas. Additionally major job centers like downtown Portland have seen a large drop in activity due to hardly any business travel, an increase in working from home, and any potential impacts related to the protests and clashes of violence.

Much of eastern Oregon so far as experienced fewer job losses during the recession and while growth in recent months is modest, Southeastern and Northeastern Oregon are the two best performing regional economies in the state so far.

Note that the Rogue Valley outlook may be up in the air today. So far, the Rogue Valley has been one of the best performing regional economies in the state. However the area was directly affected by the wildfires, and has experienced a lot of workplace COVID outbreaks. While unlikely to derail the overall trajectory of the recovery in the years ahead, near-term growth in the Rogue Valley may be weaker than the state in the months to come.

Finally, while the urban-rural gap is not widening today, over the full cycle it may. Long-run economic growth is primarily about the number of workers and how productive each worker is. Population gains are strongest in urban areas, which should propel these regional economies to faster growth in the years ahead. Additionally, urban areas, have larger concentrations in the industries expected to grow the fastest over the entire cycle than do many rural areas. As always, keep eye on capital (financial, human, natural, physical, and/or social) and investments as those will help drive productivity and overall growth in our regional economies. Even so, if these initial employment estimates prove accurate, they effectively are providing rural Oregon a year or two head start on these longer-run trends as the expansion continues and accelerates on the other side of the pandemic.

* As always, take real-time data with a grain of salt. Future revisions will change these numbers some. At this point the data is benchmarked through June and we will have a much better handle on the July-September numbers in early January when the 2020q3 QCEW data is released.

Posted by: Josh Lehner | December 2, 2020

COVID Shifts What We’re Buying

OK, this was fun. Willamette Week is out today with a set of articles highlighting some of the sectors of the economy that are doing quite well this year, despite the pandemic and recession. My hat’s off the Aaron Mesh and company for their ability to turn my spreadsheet of figures into coherent, local stories. But in general, I appreciated the request about which sectors are doing well because it allowed me to clarify my thoughts and better think through some of the changes we have seen so far this year. Last month we posted a chart showing industries that have seen job growth this year and noted a lot of them are related to e-commerce and the housing market. We fleshed out the discussion a bit further in our latest forecast document, but today I wanted to really dive into the figures a bit.

First, the main reason consumer spending has held up relatively well this year is the fact that incomes have. In fact incomes for the majority of households are flat, or up, allowing us to continue to buy things. The top line in the chart below shows total income across the country (we get 2020q3 Oregon data in a couple weeks). The main reason it is higher is due to the one-time recovery rebates back in the spring, plus the expanded unemployment insurance benefits. However even if we exclude the federal support, incomes in October were essentially back to where they were prior to the pandemic (-0.17%). Total consumer spending has rebounded accordingly. The fact that spending is still a bit weaker than incomes, means household savings is growing. Latest figures indicate Americans have saved nearly $1.5 trillion extra so far this year. That savings is literally just sitting in bank accounts at the moment and will be a key source growth next year, when the pandemic wanes.

What has changed, however, are the things we are buying. We are no longer going out to eat, to the movies, on vacations, getting hair cuts or our nails done like we used to. These activities were highly visible parts of what we did on a regular basis and today we are not doing them much. We can certainly feel this, and notice these activities are missing in our lives. But what it also did was free up a lot of money to spend on anything and everything else that doesn’t require a lot of in-person interaction. Mostly, this means physical goods we can order online. Many of these things help spruce up our apartments and homes where we are spending more time, or help pass that time at home.

In the chart below the bubbles shows different categories of consumer spending. On the x-axis going left and right, is growth in these categories in recent years prior to the pandemic. This is sort of the baseline of what one would expect sales in 2020 to look like absent COVID. On the y-axis going up and down is growth over the past 12 months. Nearly everything above the horizontal 0% line isn’t just up over the past year, but it’s up even more than pre-COVID expectations would indicate. Sales of everything below the horizontal 0% are down.

A few notes on some of these categories:

In terms of food, we are clearing going out to eat a lot less. This means grocery sales are up as we cook at home more. Interestingly enough sales of vegetables, meat, dairy, etc are up the most while sugar and sweets are up the least. This points to us really cooking at home and not just buying more junk food to keep us company. Even so, pandemic fatigue has set in. We are not cooking at home quite as much as we did back in the spring. In the past handful of months, we have begun going out to eat more, even if it’s primarily takeout, and fast food, which is now positive on a year-over-year basis.

Activities at home primarily include things that help us enjoy our time indoors more and include audio/visual equipment, computers, TVs, internet and streaming services, but also sewing, magazines, books, musical instruments, and games, toys, and hobbies.

Remodel and furnishings include furniture, carpet, windows, appliances, dishes, glassware, tools, gardening supplies, and plants. I suspect some of this is we are sitting around more at home and notice things that could be upgraded, or projects we’ve been meaning to get around to but now have the time to do so.

Outdoor recreation includes sporting equipment, camping equipment, RVs, boats, bikes and the like. As we move into winter this will include skis, snowmobiles, sleds, and so forth. The demand here is up likely due to being spaced further apart outside is less of a risk and is something fun to do.

If we’re spending more time at home that means we are also cleaning and grooming more at home. Sales of household cleaning products, toilet paper, and personal care products like shampoo, shaving-related items are up, as are pharmaceuticals both prescription and over the counter medicines.

Now, one type of spending where sales are not up includes clothes and shoes (not shown on the chart). I suspect some of this is because we like to try these on in the store. Online returns, however seamless, still require some effort and waiting a few days. Clothes and shoe sales may also be down because we are missing out on special events where we buy a new shirt, a new dress or the like. This may include weddings, holidays, school events, and even traditional back to school shopping. Such activities are fewer in number this year, or at least the gatherings are smaller in size.

Finally, the pandemic appears to have accelerated the growth in e-commerce at the expense of traditional brick and mortar. Of course this has been going on for a long time, but the shifts so far this year are larger than we have seen before, likely because we try not to venture out as much and are stuck inside, browsing the internet to a higher degree.

As such, these online sales do translate into more jobs related to moving, storing, and delivering the products. Since the start of the pandemic, Oregon e-commerce and related jobs are up 6,000, while brick and mortar retailers are down nearly 5,000 jobs, which even includes the growth at warehouse clubs. The e-commerce employment data is confirmed by growth in weight-mile taxes paid by truckers moving products into and across Oregon. Overall, these sectors are expected to grow in the years ahead. That said, e-commerce’s share of overall retail sales will drop in the year ahead when consumers feel confident again going out shopping like they used to. However, long-term trends all point toward sustained, future growth in e-commerce sales. In fact, many of the new business applications nationwide are for firms looking to focus on online sales.

All told, given incomes have largely held up so far this year, consumer spending has as well. We are clearly missing many of our normal social activities, and our spending has largely revolved around finding other ways to enjoy pass the time during the pandemic. I do believe there is strong pent-up demand for going out to eat, to the movies, on vacations, to the salon and the like. Of course this demand will not fully return until it is safe to do so. But when it is safe — and vaccines start in a matter of days, although it will be months before most of us get them — we will see a big shift back into these in-person activities. This shift will be pro-growth and pro-jobs. Even as spending on physical goods reverts back to trend, or below it for a period of time, there is unlikely to be a major impact on jobs as much of the growth is in warehousing and delivery, which were already long-run growth sectors.

Older Posts »